Conversion from s-corporation to c-corporation mid-year.

When it comes to taxation purposes, all corporations are taxed as an s-corporation or c-corporation. S-corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S-corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S-corporations to avoid double taxation on corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

C-corporations on the other hand, are taxed very differently. C-corporations are currently taxed at a flat federal rate of 21%. Because the c-corporation tax rate may be more beneficial to certain taxpayers, many will opt for their business to be taxed as a c-corporation. Most entities want the c-corporation tax treatment immediately, however, the s-corporation election must be revoked in order for the company to receive c-corporation benefits.

If the s-corporation revocation is effective the first day of the tax year, the revocation is due by the 16th day of the third month of the tax year. If the s-corporation revoking effective any day other than the first day of the tax year, the revocation must be received by IRS by the requested effective date. For example, the S-corporation is on a December 31 tax year ending and requests a revocation effective Jan. 1st, the revocation is due March 15th. The S-corporation is on a December 31 tax year ending and requests a revocation effective Feb. 14th, the revocation is due Feb. 14th.

Taxpayers should take note that the worst-case scenario for an s-corporation converting to a c-corporation is for the company to file a split return between the period where the s-corporation was effective and the effective date of the c-corporation election. The professionals at The Center for Financial, Legal, and Tax Planning, Inc. are more than knowledgeable with regards to the implications of choosing whether to organize as an s-corporation or c-corporation. Please contact us at (618) 997-3436 with any questions.